Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, the sponsor of this podcast series, continue to visit to consider various aspects of international due diligence investigations. In many ways this can be viewed as finding a needle in the corporate haystack of information and data. Tal will help us through that maelstrom to find useful and actionable information for your compliance program. In Part IV, we consider compliance related due diligence in mergers and acquisitions (M&A) and how it can protect companies from both financial loss and reputational damage.

 

The disastrous Hewlett-Packard (HP) merger with the UK Company Autonomy Corporation PLC was back in the news recently when the former Autonomy CEO was indicted by a US grand jury for making false representations in the sale of his company to HP back in 2010 for $11.1 billion. Some 18 months later, HP threw in the towel and wrote off $8.8 billion from the failed merger of the two companies. HP has claimed that Autonomy, with the knowledge and participation of its senior management, actively misrepresented its financial statements. Former Autonomy executives claim that there was no misrepresentation, only the differences in US and UK accounting standards and that HP could have performed full due diligence on Autonomy but either did so negligently or failed to do so. 

Tal noted that compliance due diligence in M&A is different than looking at numbers; it is a much deeper dive. Compliance due diligence investigations are an overriding term for a number of different aspects or applications of due diligence. There could be agent and distributor due diligence, vendor due diligence together with looking at the company and its operations, its financial information, its executives, its Board of Directors and senior management. She cautioned that in the past, many companies really do not look at the executives of a target, which can lead to multiple problems later on, in terms of the Foreign Corrupt Practices Act (FCPA) violations and also shareholder losses, market losses and volatility at all levels.

She said that rarely do the purchasers look closely at the target’s Board of Directors but that it can be an important inquiry from the compliance perspective. For instance, if the Board has any issues that the acquirer should be aware of which would impact or even dictate tone at the top; this could be critical information. It might not even be untoward information which could be uncovered in the deep dive due diligence on the Board. It could uncover potential conflicts of interest which are currently in place or could occur should the merger occur. Finally, such a due diligence on the target’s Board could give the acquirer information on both the target’s culture and what needs to be in the remediation plan after closing. 

Certainly a deep dive due diligence should be performed on the target’s CEO and senior management to see if there is anything in their past which could turn around and bite the acquirer after closing and integration. As Tal has previously noted, from her 30+ years of experience in performing deep dive investigations on senior executives, approximately 20% have significant issues in their background that were not known. Obviously this can present serious problems to an acquirer if the risks manifest after the closing. 

Tal turned to another topic she has developed through her years of work in this field, which she called “the investigative hunch.” She said, “you expect to find certain pieces of information and you don’t find it anywhere. The question is: what does that mean? Does it mean anything or is it something that’s being covered up and potentially serious?” This example shines a light that there are many different aspects to investigative due diligence, particularly in M&A. Transactional due diligence is one part of compliance due diligence in the M&A context but it is only one part. Through a more robust, deeper dive due diligence you can begin to uncover both hidden and undisclosed information that can be found through both deep media and historical Internet searches. She concluded with “it’s a much, much greater type of investigative analysis than simply Level I due diligence.”

Tomorrow we will conclude our five-part series by reviewing deep dive due diligence in light of the increase in global anti-corruption investigations and enforcements. 

Established in 1985, Infortal Worldwide has conducted over 2 million investigations globally. Infortal specializes in investigations for FCPA vendor risk management, M&A transactions, Board Due Diligence, and screening executives internationally, in addition to routine background checks. For more information, check out their website at www.infortal.com.  

DECEMBER 13, 2018 BY TOM FOX

In today’s edition of Daily Compliance News:

  • What is your investigation protocol? What will the NFL do? (Sports Illustrated)
  • OECD finds fewer penalties levied on bribe takers. (OECD Press Release)
  • How low can bribes go? In Singapore, bribes of $1 are illegal. (Reuters)
  • DOJ opens FCPA inquiry into alleged Colombian corruption (and suspicious deaths). (Bloomberg)

Over this series, I am visiting with Candice Tal, founder and Chief Executive Officer (CEO) of Infortal Worldwide, the sponsor of this podcast series. We consider various aspects of international due diligence investigations. In many ways this can be viewed as finding a needle in the corporate haystack of information and data. Tal will help us through that maelstrom to find useful and actionable information for your compliance program. In Part III, we consider what works and what does not work in due diligence investigations today.

 

Unfortunately most Chief Compliance Officers (CCOs) are working with limited information from their due diligence programs or due diligence providers. This means they do not have enough information to input into their risk assessment. As we previously explored, if a company is performing or having performed for them only a Level I due diligence, they may well only be uncovering up to 1% of the adverse information or raising the appropriate red flags. In a high-risk jurisdiction, Tal believes that if a company is not receiving up to 35% of the required information, they are really operating behind the 8-ball. 

Moreover, relying on computer searches raises an amount of concern for other reasons. These include both shell companies and front offices. There are still situations that without a physical drive by of the third parties facilitates, the address may simply be a local postal box. The problem of shell companies still exists far beyond the initial dump of information past the Panama Papers and Paradise Papers. Even with a real physical address, if your third-party shares an address of a flat in London that also houses some 1,500 additional corporations, this is a serious red flag that you are dealing with a shell company. That in and of itself is a red flag which, if not cleared, could lead to a serious legal violation and a significant reputational hit to your organization. 

Tal pointed to another area which is often missed which is the extended relationships between people in Latin America, where you can see a lot of family run enterprises. Tal stated, “A Level I due diligence will not pick up on this where one company is a family which may run multiple businesses. Some other business may be corrupt and the question becomes how does that impact the primary relationship? This can be a very important red flag that is being missed as the US Company may not even know who the real owners are going forward.”

She added that if you do not have good information to begin with on the basics, such as a company name, you cannot research a matter correctly. A  wrong company name can lead to a false negative. Due diligence might come back with no information about the company or it could come back with information on a different company, “so that’s another type of issue for some Chief Compliance Officers to be concerned about.” Of course the physical issue of whether a company actually exists or actually have employees working there can still be a problem as well.

We next turned to a strategy which a CCO could employ to allow for a sufficient level of due diligence but with an eye towards doing so in a cost-effective manner. In other words, what should be your investment in due diligence? Tal said, “a very good strategy would be to do the Level I due diligence but consider adding to it by building in deep dives on media and the Internet.” With such deeper dives a compliance professional can increase their due diligence yield to up to 35% more information than Level I can provide. This approach also allows for a quicker and more expeditious uncovering of red flags that might warrant more focused investigations. It can then allow a quicker clearing of red flags to move forward. 

With a more long-term focus a CCO needs to perform due diligence on an ongoing basis. Even if a company has done a basic due diligence investigation, feel they have a solid compliance program around their third parties, internal controls and accounting provisions, recent enforcement actions mandate more due diligence and a review of your third parties more than every two to three years. The Panasonic Avionics enforcement action made clear that due diligence should be viewed as an ongoing process. Additionally, there has been and will continue to be political instability in various areas of the world. This political upheaval can mean you find yourself in a country now having to do business in a completely different manner. Both South Africa and Malaysia have had peaceful regime changes impacting whom you may have done business with and with whom you are doing business, therefore ongoing monitoring is really vital to a solid compliance program.

Tomorrow we will consider due diligence in the mergers and acquisition (M&A) context from the compliance perspective. 

Established in 1985, Infortal Worldwide has conducted over 2 million investigations globally. Infortal specializes in investigations for FCPA vendor risk management, M&A transactions, Board Due Diligence, and screening executives internationally, in addition to routine background checks. For more information, check out their website at www.infortal.com. 

DECEMBER 12, 2018 BY TOM FOX

In today’s edition of Daily Compliance News:

  • CBS Corp more concerned that internal investigation leaked than substance of the report. (Wall Street Journal)
  • UN estimates that $3.6 trillion is lost the world’s economy annually due to bribery and corruption. (UN Press Release)
  • Former PdVSA procurement officer pleads guilty to obstruction in FCPA investigation? (FCPA Blog)
  • Elon Musk does not respect the SEC. You are surprised why? Washington Post)

Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. In this episode, Matt Kelly (the coolest guy in compliance) and I take a deep dive into two recent announcements by SEC Chairman Jay Clayton and PCAOB Chairman Will Duhnke that their agencies will turn a more critical eye towards Chinese companies and their lack of transparency in the audit process and in financial reporting. We introduce two characters, Conspiracy Tom and Conspiracy Matt to evaluate whether these announcements, made the same week as the arrest of the Chinese CFO of Huawei in Canada,   are a part of the larger trade war the Trump Administration is waging against China (Conspiracy Tom) or just coincidence (Matt). 

 

For additional reading see Matt’s blog post “US Regulators Warn on China” in Radical Compliance